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FeaturesThe Bankruptcy StrategistBankruptcyLitigation

Fifth Circuit: Subchapter V Corporate Debtors Are Subject to Discharge Exceptions

By Lawrence J. Kotler and Elisa Hyder
October 01, 2024

In the case of Avion Funding v. GFS Industries (In re GFS Industries), 99 F.4th 223 (5th Cir. 2024), the U.S. Court of Appeals for the Fifth Circuit held that corporate debtors that elect to proceed under Subchapter V of Chapter 11 are, pursuant to Section 1192 of the Bankruptcy Code, subject to the discharge exceptions set forth in Section 523 of the Bankruptcy Code. In so holding, the GFS court agreed with the U.S. Court of Appeals for the Fourth Circuit, the only other circuit court to address this issue, in the case of Cantwell-Cleary v. Cleary Packaging (In re Cleary Packaging), 36 F.4th 509 (4th Cir. 2022).

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Background

In the GFS case, the debtor, GFS Industries LLC, entered into an agreement with Avion Funding LLC. pursuant to which Avion loaned money to GFS. To secure this obligation, Avion obtained a lien on certain of GFS's future receivables. As part of the agreement, GFS represented to Avion that it did not anticipate filing for bankruptcy. However, two weeks after signing the agreement, GFS filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Western District of Texas. In its bankruptcy petition, GFS elected to proceed under Subchapter V of Chapter 11.

Avion filed a complaint against GFS in its bankruptcy case claiming that GFS fraudulently obtained Avion's financing by misrepresenting whether it anticipated filing for bankruptcy. In its complaint, Avion sought a declaration from the bankruptcy court that GFS's debt to Avion was nondischargeable due to these misrepresentations. GFS moved to dismiss Avion's complaint, arguing that the dischargeability exception on which Avion sought relief only applies to individual debtors.

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